Auto News and Information

Direct car sales and why that should be a thing

The reason you have to go to car dealerships instead of enjoying direct car sales from manufacturers is basically protectionist legislation. Image from Wikimedia Commons.

Various states have been conflicting with Tesla Motors over direct car sales and whether the electric luxury brand is allowed to sell cars direct to consumers. It’s actually much bigger than just the favorite posh eco-ride of wealthy hipsters; what’s holding them up is actually making transportation more expensive for everyone.

Direct car sales and the states

Direct car sales are exactly what they sound like; a car manufacturer sells a car directly to a customer. It’s currently prohibited by virtually every state in the union, though some states have more aggressive laws; such states are the ones in a tiff with Tesla.

While several U.S. states are allowing Tesla to have stores, others won’t. Some of the more obstinate areas have the “Tesla galleries,” where you can look at the car and ask questions – about anything but prices. Several states believe even that is going too far, and won’t allow them.

The Good, The Bad

There are a number of good reasons why direct car sales are prohibited.

For instance, let’s say a hypothetical car company – we’ll call them Schmaab – establishes direct-sale dealerships nationwide. Consumers can finance with Schmaab and take cars to manufacturer-trained service techs at the dealership’s shop. Let’s say Schmaab goes bankrupt and closes its plant in the hypothetical town of Schmollhattan, along with all dealerships. The people who bought them – probably hipsters – are screwed. OEM parts and service from manufacturer-trained technicians won’t be available.

That’s certainly reasonable enough. Tesla is a glorified upstart; car firms in business for decades even go under, just like Saab, which in no way influenced the above hypothetical.

Another reason is to keep car makers from pushing dealerships around or otherwise treating them unfairly. However, the net effect is that it keeps middlemen in business.

Even the feds hate it

Even the federal government prefers direct car sales. The Federal Trade Commission (see this blog post, among other blasts by the FTC on the topic, and this report by the Department of Justice; both assert dealer franchise laws stifle innovation, encourage an inventory model of car sales (in lieu of building to customer specification, car makers build to fit an inventory list based on what they think will be bought; consumers then have to be content with what’s available, rather than what they want) and inflate prices.

The DOJ quotes a Goldman-Sachs report which estimated an 8.6 percent savings – more than $2,000 when purchasing a $26,000 vehicle – when buying direct. Furthermore, dealership costs are estimated to make up 30 percent of the sticker price of the vehicle.

General Motors engaged in a direct-to-consumers sales model in Brazil, with the Chevrolet Celta economy car in the early 2000s; it sold for 6 percent less compared to conventional methods.

If even the feds say it stifles competition, then you KNOW it’s bad!

Stifling competition

Another area where direct car sales can increase competition is actually among car makers themselves. Tesla is a (hipsterish) upstart, competing – to some degree – with some of the biggest and most firmly established businesses in the world. General Motors, Ford or Nissan or BMW are just fine with the current model; they still move inventory and can afford the middlemen.

Tesla can’t. That’s a problem if you want to buy a Tesla and aren’t comfortable buying the car online, sight-unseen. Neither can startup car companies such as Elio Motors, which aims to sell a three-wheeled economy car for less than $7,000. (It also looks pretty cool and gets more than 80 miles per gallon.) Without direct sales, companies like them may never get off the ground.